Momentum Periods of Feedback Trading toward Exchange Rate Volatility in ASEAN Countries

Abstract

In this paper, the authors apply empirical evidence to demonstrate how important positive feedback trading factors are in understanding exchange rate behavior. Utilizing the GARCH augmented feedback model, or the exchange rate model set out by Laopodis, the author analyzes autocorrelation in exchange rate parameters and volatility in key ASEAN markets to yield deeper understanding of inducted exchange rates induced by the actions of positive feedback traders. The authors contend that positive feedback traders affect exchange rate volatility in ASEAN countries and induce the autocorrelation of negative returns within high exchange rate volatility. This study found that Singapore demonstrated a significant positive feedback trading during the period 1995–2014, while the authors further contend that Thailand, Indonesia, Malaysia, the Philippines, Brunei Darussalam, and Singapore also demonstrated positive feedback trading during the 1997–1998 Asian financial crisis. In addition to analyzing the positive feedback trading on exchange rate volatility, we also identify the exchange rate volatility spillover across the ASEAN countries. Related to this context, we found that Indonesia and Thailand play a dominant role as a dominant exchange rate volatility transmitter in the ASEAN region.